Malaysian Stocks - Equities in Malaysia

The Malaysian Plays
Companies in Malaysia will benefit from China’s growth

Overview:

One country that will benefit well from China’s growth is Malaysia. With abundant natural resources of oil, gas, palm oil, rubber, tin, and others, as well as it’s a quarter ethnic Chinese population, Malaysia will provide raw materials, energy, and foreign investments for China’s expected economic growth.

Politically, Malaysia is expected to remain stable. In October, 2003, Dr. Mahathir Mohamad, then the Prime Minister of Malaysia, stepped down. Abdulla Ahmad Badawi, an avuncular Islamic scholar and former Foreign Minister with a quarter of Chinese blood, came to power. His made mild personnel changes to his cabinet but with rather drastic changes in his government policies, aimed at fighting corruption and making the government more transparent. While others criticized him for not being more progressive in his cabinet selections, stability would be more easily achieved by keeping most of the former members in.

Economically, Malaysia has maintained a trade surplus with the rest of the world since 1998, partially thanks to the devaluation (and pegging to US dollar) of its currency, Ringgit. It is expected that Ringgit will continue to be pegged to US dollar. Although about 20% to 25% of Malaysia’s exports are electronic products, its agriculture sector presents promising growth. In fact, February (2004)’s palm oil exports increased 38% compared to previous year’s levels, and total exports to China increased 32% on a year-to-year basis.

Malaysia’s stock market also presents opportunities. Currently, private US investors cannot purchase Malaysian shares (not even ADRs or pink-sheet stocks), which is a plus sign for intelligent investors to be front-runners. Malaysia’s plantation companies, transportation companies, and companies related to tourism would be the direct beneficiaries of the growth of China, while electronic product manufactures would face competitions from increased cheap products coming out of China.

Malaysia Will Benefit from the Economic Growth of China

Malaysia, a middle-income country, transformed itself from 1971 through the late 1990s from a producer of raw materials into an emerging multi-sector economy. Today, about a quarter of all Malaysian’s exports are electronic products. However, as demand from China for raw materials and natural resources grows as expected, agriculture and energy related exports will play a more important role. Please see China effects on commodities market. Malaysian plantations as well as transportation companies will be the primary beneficiaries of this China commodities effect.

Companies related to tourism will be another industry that could benefit investors. On my trip to Malaysia, I discovered that flows of Chinese tourists were visiting Malaysia. In fact, Malaysia is one of the countries that provide the easiest access for Chinese tourists in terms of visa application. For Chinese people who wish to travel abroad for pleasure, while obtaining a US visa is impossible and applying a Singapore visa requires sponsorship from a Singaporean (unless you are traveling with a group), Malaysian entry visa can be obtained easily for less than 10 US dollars. Hotels, gambling casinos (read why Chinese people love to gamble), and transportation companies flourish from Chinese tourists.

Politically, Malaysia Remains Stable

Perhaps we still remember former Malaysian Prime Minister Dr. Mahathir Mohamad’s blame to international capital flow for causing the Asian Financial Crisis in 1997. Dr. Mahathir served as a Prime Minister for Malaysia for more than two decades. He was responsible for devaluating and pegging the Ringgit to the dollar following the financial crisis. He also imposed capital control, and foreign investors (mainly investors from Singapore), sold Malaysian shares in panic.

Five years later, in October 2003, Abdullah Ahmad Badawi became Malaysia’s new Prime Minister. If history is our guidance, political or social instability frequently follow a long period of strongman rule. However, it might be the exception for Malaysia.

In March 2004, Abdullah Ahmad Badawi called for a snap national election, and won a bigger share of the vote Dr. Mahathir ever secured. He made mild cabinet changes and kept Dr Mahathir's original cabinet members—including several accused of corruption—in the top jobs. While critics might question his intention of reforms, his move would preserve political stability in Malaysia.

Abdullah Ahmad Badawi is not without reform mind. He promised more openness and accountability in government, less corruption, fewer expensive prestige projects, more rural development, etc. Before the March election, he had already cracked down on corruption, unraveled deals between the government and connected businesspeople, and demanded greater transparency. Other results include multibillion-dollar Mahathir-era infrastructure projects canceled, government stake in Telekom Malaysia sold to Singapore, open-tender government contracts called for, and Malaysia reinstated on CalPERS investment list.

Malaysia’s Equity Market Will Attract More Foreign Investments

On September 2, Abdullah Ahmad Badawi released Anwar Ibrahim, former deputy prime minister from prison, who marshaled street protests against Mahathir in 1998 and was subsequently arrested and sentenced to prison terms totaling 15 years for corruption and sodomy.

Bloomberg reports: Malaysian stocks surged as investors welcomed the decision to release Anwar, a former Mahathir protege who was sacked as finance minister in 1998 and who maintained his convictions were politically motivated. Abdullah, who succeeded Mahathir last October, has pledged more transparency in government, stepping up efforts to woo back investors deterred by Mahathir's 1998 imposition of capital controls and a currency peg.

The verdict ``has to be regarded as a positive move,'' said Khiem Do, Hong Kong-based head of Baring Asset Management's Asian investment team, which oversees $2.7 billion of Asian assets. ``This is consistent with the trend of Abdullah in terms of trying to bring about a fairer structure.''

Anwar was seen as heir apparent to Mahathir until he was sacked and later jailed on charges of corruption and sexual misconduct. His conviction was criticized by countries including the U.S. and Australia.

``Foreign investors may not have viewed Malaysia charitably in the past because they think Anwar was jailed unfairly,' said Richard Cohen, senior vice president of institutional equity sales at CIMB Securities Sdn. in Kuala Lumpur. ``Investors may commit more funds to a country they view more positively.''

``From a foreign perspective it's a signal of change,'' said David Ng, who helps manage the equivalent of $316 million in stocks and bonds at Hwang-DBS Asset Management Sdn. in Kuala Lumpur. ``This heralds a new beginning for the country.''